Public borrowing will soar to a record £175 billion this year – 12.4% of the UK’s annual economic output – Chancellor Alistair Darling has said.

The plunge into red comes as the Treasury wrestles with a toxic combination of falling tax receipts, higher spending and the cost of bank bail-outs.

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Including the £90 billion borrowing for 2008/09 unveiled on Wednesday, total net borrowing is forecast to hit £696 billion by 2012/13 – almost £240 billion more than the Chancellor predicted in November’s Pre-Budget Report.

Mr Darling also confirmed the worst year for the economy since the Second World War with a 3.5% decline in 2009 – far worse than his pre-Budget forecasts.

He expects the economy to grow by 1.25% in 2010 – also below November’s forecasts – before the pace of the economy quickens in 2011 with a 3.5% expansion.